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Weekly Review - March 29, 2016

Weekly Review - March 28, 2016

Guest Post - Monday, March 28, 2016

Summary

  • A slow week for economic releases included a slowing in durable goods orders, mixed housing data, and GDP for the 4th quarter of last year that was revised upward slightly from an earlier estimate.
  • Equity markets declined globally as a result of the Belgian terrorist attacks and lower energy prices, while bonds were little changed due to minimal changes in yields during the week. Oil prices fell a few dollars from the prior week.

Economic Notes

(0/-) Durable goods orders in February fell by -2.8%, which was just slightly better than the -3.0% decline expected. A large portion of the headline result was due to a -27% drop in the civilian aircraft category, which is notoriously volatile month-to-month. Removing this impact, core orders fell -1.8%, compared to a -0.5% median forecast, due to weakness in a variety of areas including electrical equipment and machinery, which declined roughly -3% each. Core shipments fell -1.1% for the month, which disappointed relative to a +0.3% gain expected.

(0) The FHFA house price index rose +0.5% for January, which was right on target with expectations. Regionally, the South Atlantic area and West North Central areas experienced gains of over +1%, while the Middle Atlantic fell by -1% and lagged the pack. Year-over-year, this index is up +6%, which represents solid price gains from a historical pricing standpoint.

(-) Existing home sales for February fell by -7.1% to 5.08 mil. units, which was greater than the expected -3.0%. Both single- and multi-family were down by about -7% (rounded), so contributed equally to the month's decline. Regionally, the Northeast and Midwest were down close to -15%, while the South and West fell much less severely, in the single digits. Apparently, the Northeast area may have been affected by weather conditions that depressed contract signings. However, sales were up +2.2% from a year ago at this time.

(+) New home sales rose +2.0% in February, coming in at 512k, compared to a 510k reading expected, and January's results were revised upward. The gain was led by sales in the West, which rose +42k over the prior month, while other regions declined. Year-over-year numbers are down -6%, due especially strong numbers a year ago. Inventories are also higher, at 236k, which is the highest level in 7 years. With spring selling season being prime time for home purchases, the next few months will likely provide a much more accurate and complete picture.

(0/+) The final reading on 4th Quarter 2015 GDP showed an increase from the previous estimate from +1.0 to +1.4%, which was a bit better than expectations. Consumer spending in services and durable goods ended up being the primary drivers of the improvement, with a revision in growth up from +2.0% to +2.4%. Exports were also revised up a slight amount. As inventories experienced less of a drag than expected, that could end up benefitting GDP for Q1, which is expected to be in the 2.0-2.5% range.

(0) Initial jobless claims for the Mar. 19 ending week rose -4k less than expected, to 265k. Continuing claims for the Mar. 12 week fell to 2,179k, lower than the 2,235k expected. No special factors were reported from the Dept. of Labor. Despite some natural week-to-week volatility, these levels continue to remain quite low.


Read the "Question of the Week" for March 28, 2016:

In a low yield environment, many investors have been drawn to high-income strategies. What are the risks?


Market Notes

Period ending 3/24/2016

1 Week (%)

YTD (%)

DJIA

-1.49

1.22

S&P 500

-0.65

0.14

Russell 2000

-1.99

-4.65

MSCI-EAFE

-2.42

-5.11

MSCI-EM

-1.59

2.45

BarCap U.S. Aggregate

-0.04

2.39

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

3/18/2016

0.30

0.84

1.34

1.88

2.68

3/24/2016

0.30

0.84

1.34

1.88

2.68

On a low-volume week shortened by Good Friday and marked by a terrorist attack in Belgium, markets were generally lower, as oil prices declined a bit and the dollar strengthened. Health care and utilities were the best performing sectors, while energy and financials lagged—the latter due to oil pricing as correlations have obviously been quite high between the two factors.

Financial conditions have eased since lows in mid-February, effectively causing the same response as lowering interest rates (albeit in a more flexible and non-official way than through the Fed's channels), through lower credit spreads and better liquidity. The VIX volatility index has also fallen during that time, as it tends to do when conditions become less uncertain.

Foreign stocks in local terms performed similarly to U.S. issues, but a stronger dollar translated into an additional decline. Emerging markets India and China gained a few percent on the week, and Japan was positive in local terms. Europe was among the laggards, which is no surprise given that it was the epicenter of the recent terror attack, which naturally depresses sentiment. Brazil also struggled on the week as the worst-performing market, although year-to-date gains remain impressive, as the political drama there continues to unfold with new twists and turns on a weekly basis. However, on net, very little appears to have changed.

U.S. bonds were little changed, as interest rates ticked up slightly across the middle of the yield curve, but remained flat on the longest portion. Credit outperformed governments as spreads tightened a bit on the week, as bank loans outperformed and high yield lagged (in unison with energy prices again). Foreign bonds were similarly flat, but a stronger dollar translated many of these returns into the negative by about a percent.

Real estate in the U.S. performed largely in line with other domestic equities; European REITs suffered along with equities in that part of the world. Lodging/resorts was one of the strongest underperforming groups, which is no surprise, considering the terrorist attach aftermath can create concerns about travel plans.

Commodities fell a few percent in the short week, with crude oil prices dropping a few dollars from just over $41/barrel last week down to $39.60, which, at these levels, is a decent-sized percentage change we've become used to seeing as of late. Other groups, including precious and industrial metals also fell, while agriculture came in flat on net.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger's, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder's, Standard & Poor's, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for March 14, 2016.

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